Investing In Exchange Traded Funds (ETFs): Explaining ETFs

One of the most popular types of investment funds today is the ETF (Exchange-Traded Fund). Exchange-Traded Funds (ETFs) like mutual funds contain a preselected collection of stocks, assets, and bonds. For investors, trading with ETFs allows you to buy and sell many stocks or bonds in a single trade. Because ETFs contain a basket of securities, your exposure to risk is reduced because if a small portion of the underlying stocks is not performing well, there could be others in the ETF that may augment that.

One commonly traded ETF: SPDR ETF

When you own one share of SPY, you effectively are investing in the 500 large-and mid-cap U.S stocks. They also have a high turnover. You can distinguish ETFs by the unique tickers that represent them on the stock exchange. Other common types of ETFs include stock ETFs, commodity ETFs, bond ETFs, International ETFs, and Sector ETFs.

Below is a screenshot from etfdb.com where you can see the performance comparison between SPY and QQQ. SPY tracks the SP500 while QQQ tracks the Nasdaq 100. You can see that QQQ has a better 2020 YTD return than SPY. This is most likely due to the fact that QQQ tracks the tech stocks which have done well during the U.S. Covid-19 outbreak.

Explaining ETFs: What Are Exchange Traded Funds?

An Exchange Traded Fund (ETF) is a type of security that involves a number of securities such as stocks and commodities that represent a given underlying asset. To explain this further, we take the example of Invesco Active U.S. Real Estate Fund (Ticker: PSR), which is an ETF that consist of the following securities:

American Tower Corporation.
Crown Castle International.
Prologis Inc.
Equinix, Inc.
SBA Communications Corp. Class A.
Digital Realty Trust, Inc.
Public Storage.
Equity Residential.
Welltower Inc.
AvalonBay Communities, Inc.

So when you buy a single share of Invesco Active U.S. Real Estate Fund (PSR), you are indirectly investing in the 10 companies that are a part of the given asset. Additionally, you can track the performance of PSR by going to your online brokerage account or through another finance source such as Yahoo Finance:https://finance.yahoo.com/quote/PSR/

Pros and Cons of trading ETFs

Some key advantages of ETFs:

They assist in diversifying your portfolio because investing in one ETF exposes you to many underlying securities.
Low to zero cost of investing (trading fees).
Many have high liquidity (meaning easily bought and sold during trading hours).
Limited Capital tax gains. Tax benefits where capital gains tax are incurred only upon the sale of the ETF.
They can provide zero to no trading cost if you leverage an online brokerage that provides zero trade commission for ETFs.

Some key disadvantages of ETFs:

Potential High Bid/Ask Spread. Some ETFs during the intra-day can command a large spread between the bid and ask price.
Lower dividend yields. Most dividend-paying ETFs usually have a low yield as compared to owning a dividend-paying stock.

Popular ETFs Today

If you are interested in finding out which ETFs you should invest in, here are some of the popular ETFs today:

SPDR S&P 500 ETF (SPY)
Vanguard S&P 500 ETF (VOO)
Best No-Fee: Fidelity ZERO Total Market Index Fund (FZROX)
Best For Active Traders: SPDF S&P 500 ETF (SPY)
iShares Russell 2000 ETF (IWM), for U.S. dividends
Schwab U.S. Dividend Equity ETF (SCHD)
Best Gold ETF SPDR Gold Trust (GLD), for NASDAQ large-cap stocks
Invesco QQQ (QQQ)
Best International, Vanguard FTSE Developed Markets (VEA)
iShares Core U.S. Aggregate Bond ETF (ACG)

Trend Finder: Invest and profit with ETFs

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Investing in ETFs for Beginners